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Edited Transcript of PPT.AX earnings conference call or presentation 20-Feb-20 12:00am GMT

Sydney Mar 18, 2020 (Thomson StreetEvents) — Edited Transcript of Perpetual Ltd earnings conference call or presentation Thursday, February 20, 2020 at 12:00:00am GMT

Citigroup Inc, Research Division – MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst

Good morning, everyone. Welcome to Perpetual’s half year results briefing. My name is Cathy Buckmaster, Senior Manager of Investor Relations.

Before we begin today, we acknowledge the traditional owners, the Gadigal people of the Eora Nation, as the custodians of this land, recognizing their connection to land, waters and community. We pay our respects to Australia’s first peoples and to their Elders, past and present. We would also like to extend our respect to and welcome any aboriginal people who are present today.

Presenting today’s results are Rob Adams, Perpetual’s Chief Executive Officer and Managing Director; as well as Chris Green, Perpetual’s Chief Financial Officer. There will be an opportunity to ask questions at the end of today’s presentation for both those in the room and on the phone. Lastly, could I ask you to turn off your mobile phones.

Over to you, Rob. Thank you.

Thanks, Cathy. Good morning, everyone. Thanks for coming to our offices here in Angel Place and for those on the phone, thanks for joining us for the briefing this morning. Firstly, I’ll take you through an overview of the operational performance of the group and our 3 divisions: Perpetual Investments, Perpetual Private and Perpetual Corporate Trust. I’ll then provide some context regarding the operating environment that we are working in. Chris will then take you through the financials in greater depth and look at the key drivers for each of our businesses.

As many of you are aware, the financial services environment remain challenging during the first half of the 2019-2020 financial year with regulatory macro geopolitical influences continuing to impact all participants, including Perpetual. Despite this, Perpetual achieved a great deal operationally. We have begun to successfully execute our strategic priorities. We’ve put in place our refreshed operating model, and we are starting to deliver on our strategy for future growth.

Looking at our headline numbers. We reported total revenue of $253.5 million, a slight increase of $1.2 million on the prior corresponding period. Expenses were $173.8 million for the half year, which was an increase of 4%, staying within our expected range of 2% to 4% growth as we continue to invest for growth and execute our strategic initiatives. Net profit after tax was $51.5 million, 14% lower on the prior corresponding period. Our Board has declared a dividend of $1.05 per share for the half, which is in line with our policy of paying between 80% to 100% of NPAT.

For those of you who joined our November Investor Day, our strategy will be familiar. A quick refresh is on this slide. Our purpose is to deliver enduring prosperity for our clients, our people and for our shareholders. We are a deeply client-centric firm and we seek to earn the trust of our clients every day through every action. Our 3 strategic imperatives are: to provide exceptional products and outstanding service to our clients; to be future fit by empowering talented people to deliver high performance; and thirdly, to create new horizons by adding new capabilities and geographies to our footprint over time.

I’m pleased to say that our progress against these strategic imperatives over the last half has been positive as we seek to exploit opportunities that will deliver growth, quality and sustainable growth. We’ve capitalized on the dislocation in the advice industry and grown Perpetual Private adviser numbers by 16, which represents growth in adviser numbers of 24%.

Our new operating model is now largely in place. An important aspect was the formation of Perpetual Client Solutions, which brings together a number of operational support functions from across the business. This will be led by our recently announced Chief Operating Officer, Amanda Gazal, who will join us towards the end of April. We expect our new operating model to drive efficiencies across the business. And it will ensure that Perpetual remains nimble in a fast-changing world.

We have started to deliver on our M&A agenda through the acquisitions of Priority Life and more recently, Trillium Asset Management. Priority Life is a Melbourne-based specialist risk advisory business with a strong focus on medical professionals, which was acquired during the half. We are already starting to see the benefits of this acquisition with cross-referrals beginning to flow.

Boston-based Trillium is a pioneer in the fully integrated ESG investing in — ESG invest — fully integrated ESG investing. And this acquisition will add world-class investment capability to Perpetual in the fast-growing sustainable investing sector. Trillium currently manages AUD 5.5 billion, that is converted, meaning our total funds under management at Perpetual will increase by around 20% post completion, with significant capacity to grow. To drive future growth, we have established a U.S.-based distribution team, which I’ll comment on shortly.

Lastly, we’ve made some important leadership appointments that will help drive our growth agenda. I’ll highlight some of these later in the presentation. With these new additions to the team, I’m very confident we have the right people in place to execute our growth strategy.

Turning our focus first to Perpetual Investments. Globally, equity markets continued to drive forward over the half with record highs reached in most developed markets, and Australia was no exception. Valuations continue to expand to all-time highs, making the environment very difficult for value managers like Perpetual. Despite this continued trend in the quarter to 31 December, we were pleased to report positive net flows with strong inflows into our cash and fixed income capabilities offsetting outflows in other asset classes. Total funds under management finished the period at $26.3 billion.

As mentioned, global equity markets continued their inexorable run with the bull market now entering its 11th year. As this chart shows, valuations are now stretched well beyond the past highs seen in the tech bubble back in 2000 and in the pre-GFC period. Such extreme valuations have clearly continued to impact Perpetual’s relative investment performance across most of our Australian equity funds. Whilst our performance when measured against our value counterparts remains solid, our poor performance when compared to the broader benchmark continues to impact net flows.

Perpetual’s investment process has served investors well for more than 50 years, and we remain confident that our constant application of that process will deliver over the long term. It is during the periods of valuation normal — I beg your pardon. It is during periods of valuation normalization when Perpetual delivers most strongly for our Australian equity clients. Our cash and fixed income funds continued to deliver to investors with strong net flows leading to total assets in cash and fixed income approaching $9 billion or over 1/3 of our total funds under management.

I’d like to now take a few minutes to focus on the Trillium acquisition. The case for and interest in ESG investing is clear and growing, supported by 2 global megatrends: firstly, the largest intergenerational transfer of wealth in history; and secondly, the rapidly growing demand for ESG driven by a global change in social consciousness. As this chart shows, millennials and Gen Xs, the current and future recipients of this wealth transfer, have a far greater desire to invest in ESG strategies than baby boomers. This desire will drive money flows around the globe for decades to come.

In the past, many have viewed ESG investing as a good thing to do but have assumed that investment returns would suffer. In reality, an aggregation of over 2,200 studies looking at the impact of ESG investing on investment performance has shown that ESG investing delivers superior performance over time. And it sort of make sense. This fact, coupled with the changing social consciousness, is driving unprecedented demand for ESG investing, which to date has been strongest in Europe, as the chart on the right shows there. We believe this is more than a trend and rather a structural shift that is here to stay. Excuse me, bit of man flu. My apologies for the voice.

It’s this combination of facts that led us to Trillium, and we’re excited about the future prospects for our partnership. As mentioned, Trillium is a pioneer in ESG investing founded in 1982 by Joan Bavaria, who is known as the founding mother of socially responsible investing. Trillium has a long track record of fully integrated ESG investing, simultaneously reviewing both traditional and — traditional financial metrics and proprietary ESG metrics of every company analyzed. This fully integrated approach has delivered superior returns over time and is a far more thorough approach when compared to the vast majority of ESG funds, who simply had positive or negative screens.

Trillium will manage — Trillium manage assets across various U.S. equity strategies, including a fossil fuel free portfolio track record of over 20 years. They also run global equity strategies and our U.S. core bond strategy. The business has significant capacity to grow across all capabilities.

We see growth opportunities for Trillium around the world. The Trillium team is entirely focused on its mission of ESG investing and has partnered with Perpetual in order to retain that focus, whilst Perpetual will help drive growth in assets under management. We will leverage our existing distribution team and our strong brand here in Australia. We have commenced the build-out of our U.S. distribution team, and we will seek to benefit from the proposed EU legislation that requires asset allocators to integrate ESG into their investment policies.

Turning now to a quick overview of the details of the transaction. Perpetual is acquiring 100% of Trillium and we expect to complete the deal on or before 30 June. In addition to the upfront consideration, which is paid from existing cash, there is a potential earn-out, the majority of which is linked to revenue growth. The maximum earn-out of USD 20 million will require revenues to more than double over 4 years. Importantly, we’ve retained all key staff, and the initial costs associated with the creation of our U.S. distribution team are embedded in the deal metrics. Trillium’s CEO, Matt Patsky will report to David Lane, whose title will change to Group Executive, International Asset Management.

I previously commented that Perpetual seeks to have world-class investment expertise and world-class distribution. Trillium adds to our world-class investment team, and we continue to attract world-class distribution leaders to Perpetual. As you know, Adam Quaife commenced as our Global Head of Distribution back in December with proven success managing asset management distribution teams in Australia, the Middle East, Europe and Asia.

Today, I’m delighted to announce that Chuck Thompson will join Perpetual as Head of Distribution and Corporate strategy for the Americas. Like Adam, Chuck and I have previously worked together. Chuck ran Henderson’s U.S. distribution team for 15 years, building a $20 billion business over that time. To have distribution leadership with this quality, driving our growth in the markets previously untapped by Perpetual is an exciting development.

Moving to Perpetual Private. I’m pleased to report that despite the dislocation that continues to impact the advice industry, the first half saw positive funds under advice flows, making it the 13th successive half of growth for the business. Our funds under management in PP also grew, whilst our market-related margin remain flat.

New client growth continued in our high net worth business, our medical channel and in Fordham, our accounting business, with the average new client size also increasing over the period. In future periods, we will expect to see Priority Life delivering growth in clients and in referrals to other parts of Perpetual Private, just as our existing channels have done.

A year ago, I stated that the focus of Perpetual Private was to be bolder and that we want — we would pursue opportunities arising from the dislocation of the advice industry, both organic and inorganic. I’m pleased to report that we have done just that with 16 new advisers joining PP, a growth of 24% over the year, as I mentioned, which is well ahead of our own expectations. The advisers joining Perpetual are amongst the industry’s best, managing high net worth client books of over $80 million on average.

Given the extent of change impacting the advice industry, to see such growth has been really pleasing, particularly when most of our peers are seeing declines in the number of advisers. Feedback from advisers who have joined us is that Perpetual’s brand and trusted reputation is a key attraction point, as is our proven advice model. Our pipeline of potential new advisers remain strong and Perpetual’s — as Perpetual’s key attributes are keenly sought after.

A year ago, we noted that we would seek out inorganic opportunities for Perpetual Private. And in Priority Life, we have found a business that’s focused on similar channels with strong potential for cross-referrals to PP’s broader wealth offering. This acquisition was completed in the half via cash and share consideration with a deferred earn-out.

Priority Life is one of Australia’s leading risk advisory firms. It has a strong client base of more than 2,500 clients, the majority of whom are medical professionals. Over 700 of these clients are already meeting our criteria as true high net worth clients. Priority Life has seen solid growth in recent years, with revenues growing 56% over the last 4 years. Client transition has been very smooth, and we expect this transaction to be EPS accretive from next financial year.

Turning now to Perpetual Corporate Trust. PCT has had a terrific start to the financial year, producing record growth in the first half with all 3 areas of PCT contributing to that growth. Demand continues to be strong in the Managed Funds Services business with funds under administration now reaching $274 billion in the half. This delivered a revenue contribution to the group of $27.6 million, up 12% over the prior period.

Following the Royal Commission, we expected that asset managers would increasingly seek to appoint independent responsible entities. And that has indeed been the case with large managers now, such as First Sentier, appointing Perpetual to that critical role during the half. The market for DMS was largely driven by demand from both domestic and global fund managers looking to invest in the Australian commercial property market, the Scape transaction being a good example of that.

Our Debt Market Services business delivered another strong half performance with funds under administration now approaching $0.5 trillion and revenue growth of nearly 15% versus the prior corresponding period. DMS benefited from the high level of public securitization issuance during the half, which has been the highest since the GFC. Both the bank and nonbank sectors grew strongly during the period with significant transactions, including La Trobe and CBA’s Medallion Series.

Finally, the third engine for PCT, our Data and Analytics Solutions business, had a positive half, attracting new clients across each part of the business during the period. We successfully launched 2 modules under Perpetual business — the Perpetual Business Intelligence platform, while Perpetual Roundtables have held 22 sessions across Australia and New Zealand over the half, delivering insights on more than $2.4 trillion of balance sheet data to senior credit and risk professionals of leading financial services firms.

Before I hand over to Chris, I’d like to highlight the consistent growth we’ve seen from PCT over the last 7 years. Over that time, you can see how PCT has continually expanded its product range organically and via successful acquisitions, entering into new fields and providing more services to our clients. Innovation from within and quality execution has driven this growth year in, year out. And we expect that to continue into the future.

I’ll now hand over to Chris, who will take us through a more detailed review of the financials for the half. And then I’ll return with some closing remarks and then open up for Q&A. Thank you.

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Christopher Green, Perpetual Limited – CFO & Interim Company Secretary [3]

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Thanks, Rob. And good morning, everyone. Our results, as Rob has said, reflect different conditions for our respective business units as well as decisions taken by the management team to prepare the company for future growth. This half, we’ve made good progress in delivering our strategic initiatives to support future growth. That said, the results this half are mixed across our 3 business units.

In summary, operating revenues of $253.5 million were $1.2 million higher. Total expenses of $173.8 million were 4% higher, at the top end of our 2% to 4% stated guidance. Excluding significant items, underlying profit after tax of $56.2 million was 7% lower, while net profit after tax was $51.6 million, down 14%.

Significant items include the implementation costs associated with the operating model review. We spent $4.6 million, after tax, this half in reshaping our business model. These one-off costs have been excluded from the operating expense line this half, and I’ll talk more to that operating review in a few minutes.

The effective tax rate of 29.4% was in line with this time last year. The interim dividend of $1.05, representing a payout ratio of 95%, is at the higher end of our guidance to pay 80% to 100% of NPAT on an annualized basis. And return on equity of 15.6% was down from 18.2%.

Let’s now look at revenue in more detail. The $1.2 million increase was driven by double-digit growth in Perpetual Corporate Trust, modest growth in Perpetual Private, offset by an 11% decrease in Perpetual Investments off the back of lower FUM and lower performance fees. Other income of $5.6 million was higher due to lower unrealized losses on assets at fair value, partially offset by lower unit trust distributions. And finally, interest income was down, reflecting lower interest received on bank deposits.

On expenses, the $6.8 million or 4% increase is primarily driven by higher depreciation and amortization, which I’ll expand on shortly, higher general and administrative expenses, combined with a small uptick in equity rem. These increases were partially offset by lower staff costs due to lower variable rem and lower premises costs as a result of the adoption of AASB 16 on the 1st of July.

Under this new leasing standard, operating leases previously disclosed as a commitment and off balance sheet are now recognized as a right to use asset on the balance sheet and depreciated over the life of the lease. The corresponding liability for the lease obligation is also recognized and amortized over the life of the lease. Whilst there isn’t any impact on cash flow, the recognition of both the asset and liability have resulted in higher depreciation and interest expense at the group and business unit level, offset by lower premises costs where the rental payments were previously reported.

General and administration costs were 4.8% higher and include onboarding costs associated with the Advisor Growth Strategy, Priority Life acquisition costs as well as costs associated with the evaluation of other inorganic opportunities. We continue to see higher costs associated with strengthening our risk and governance functions and implementing the myriad of changes in legislation and regulation. These increases were partially offset by lower equity raising and listing costs. As you may recall, we raised equity in PIC in the first half of ’19 and the listed Credit Income Trust in the second half. The increase in equity rem is due to a write-back of equity rem this time last year.

As Rob outlined earlier, we have made a lot of progress this half in delivering on our strategic initiatives. We’ve largely completed the first phase of the operating model review, which is expected to deliver between $18 million and $23 million in annualized savings for the group from FY ’21. We spent $4.6 million post-tax reshaping our workforce and bringing together our support functions through the creation of Perpetual Client Solutions under a new COO role. Whilst we saw modest cost savings coming through over the half, we expect more to flow through in the second half this year as the majority of that Phase 1 activity was completed late in the half.

The second phase of the operating model review is underway with a focus on process automation across the new Perpetual Client Solutions team as well as the wider business, whilst we continue to reshape the workforce. We expect to spend between $5 million and $8 million further post-tax over the remainder of the year with the full benefits expected to be realized from FY ’21.

Those benefits, combined with continued investment and process improvement, the completion of the Trillium acquisition, including the establishment of U.S. distribution capability, mean we expect to see expenses grow towards 4.5% on a full year basis. Expense growth could end up higher if we execute further acquisitions in the second half. Any further acquisitions will need to be positively contributing to earnings within 12 months.

In terms of completion and integration costs for the Trillium acquisition, we estimate the range of $3 million to $5 million, assuming integration is completed in FY ’21. These costs are considered to be nonrecurring and would not be included in our BAU growth profile for the FY ’21 year. As we stated, we expect this transaction to be EPS accretive in FY ’21 on an underlying basis.

Moving now on to the business units, starting with Perpetual Investments. As Rob has discussed, PI’s performance continues to be impacted by the prolonged bull market, which has favored growth over value investing. In terms of results, total revenue of $94.5 million was down 11%. The decrease was largely due to lower average FUM from continued outflows as well as lower performance fees.

Average FUM of $26.3 billion was 11% lower compared to $29.7 billion this time last year. We saw outflows of $1.5 billion over the half across all channels. But in Q2, it was pleasing to see that we finished with positive flows for the first time in 10 quarters. We received $0.5 million of performance fees over the half compared with $1.4 million this time last year. Those fees were largely attributable to our structured EMCF products.

Average revenue margin for the year was 72 basis points, 1 basis point higher than last year. Excluding performance fees, underlying average margins were in line at 71 basis points, reflecting the lower proportion of institutional mandates. Expenses were 4% lower compared to the first half of ’19 and 14% lower than the second half. The decrease was largely due to lower spend on listed strategies over the 12 months.

As I mentioned earlier, we raised capital for the PIC in the first half of ’19 and the Credit Income Trust in the second half. Pursuit of inorganic opportunities through the remainder of FY ’20 will continue to impact on expenses in PI. PBT margin on revenue was down 5% due to the lower revenue but 5% higher than 2019.

Now to Perpetual Private. Perpetual Private reported total revenue of $93.5 million, $0.9 million or 1% higher compared to the corresponding half last year. Closing FUA of $15.2 billion was 11% higher compared to the first half and 3% up on the second half, driven by positive net flows and higher equity markets.

Market revenue of $62.8 million was $2.3 million higher, driven by the higher average FUA supported by equity markets but was partially offset by the impact of legacy book repricing. Nonmarket-related revenue of $30.7 million was $1.4 million lower or 4% in this time last year. Despite customer numbers continuing to grow, the lower revenue this half reflects the impact of lower interest rates and estate administration revenue, partially offset by Priority Life’s contribution. Some of the legacy book repricing is limited to this half. However, as we flagged at the Investor Day in November, some will flow into the second half.

Total operating expenses of $67.1 million were 5% higher than the first half and 2% lower than the second. The increase includes recruitment activity as part of the Advisor Growth Strategy, Priority Life acquisition costs as well as some remediation costs related to self-identified legacy issues. Adjusting for those items, the increase from the first half would have been closer to 2%. The market-related revenue margin was 2 basis points lower than last year due to the repricing adjustments I’ve noted earlier.

To Corporate Trust. PCT had another strong half. Total revenue of $60.8 million, up 13%, reflecting continued momentum across all parts of that business. Debt Market Services revenue of $33.2 million was 15% higher. Rob has noted that 2019 was a record year for public securitization issuance since the GFC. We’ve benefited from that growth in bank but also particularly nonbank lenders as well as the full year contribution from Perpetual Roundtables, which we acquired late in the first half of ’19. These have contributed to the growth of our Data and Analytics Solutions business.

MFS revenue of $27.6 million was 12% higher than last year, driven by demand from both domestic and global fund managers looking to invest in the Australian commercial property markets. Consequently, we continue to see growth in our custody and our Wholesale Trustee service offerings.

Total operating expenses for PCT were largely flat compared to the first half of ’18 and 8% lower than the second half, reflecting cost discipline and notwithstanding the inclusion of the additional BAU costs associated with the Roundtables business acquired. Depreciation and amortization were up 55%, off the back of continued investment in technology upgrades and product enhancements in Data and Analytics Solutions, amortization of the earn-out associated with the Roundtables acquisition, and of course, the adoption of the new leasing standard. These increases were partially offset by lower equity rem. PCT’s PBT margin was 45% of revenue, 2% higher than last year.

Now to the balance sheet. The change in cash and cash equivalents reflects lower cash generated by the business this half. Liquid investments, which include our seed funds, were up 16% compared to December 2019 and 6% since the 30th of June. This reflects mark-to-market adjustments in our seed funds and investments in unlisted unit trust investments, reflecting the stronger market conditions.

Goodwill and other intangibles increased by 8%, reflecting the acquisition of Priority Life. And the 36% increase in other assets since June ’19 largely reflects the adoption of the leasing standard. On adoption, the group recognized a right to use asset of $82.3 million and present value of future lease liability obligations, including extensions of $100.3 million. This led to an opening adjustment to retained earnings of $3.5 million and a net reduction to the balance sheet of $21.5 million on the 1st of July. The balance sheet remains strong. Gearing remains low, and goodwill continues to be supported by solid income flow from each of the 3 business units.

While EPS is down, reflecting a lower earnings profile this year, Perpetual’s ROE remain solid at 15.6%. The fully franked interim dividend of $1.05 represents a 16% decrease on the first half of ’19. It will be fully franked and represents a payout ratio of 95% of consolidated first half NPAT.

With that, I’ll hand back to Rob to close, and then we’ll take questions.

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Robert William Adams, Perpetual Limited – MD, CEO & Director [4]

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Thanks, Chris. Okay. To sum up, 3 things drive us here at Perpetual. First, we are entirely focused on delivering to our clients. We’re focused on delivering the best products and the best services. Perpetual’s brand is trusted by our clients, and we have a deep belief that their trust is earned in every action we do every day. We constantly strive to do more, to innovate more and to deliver more to our clients. Our new operating model will ensure that we do so and we do so more efficiently.

Secondly, our business needs to be future fit. We need to ensure we have the best people, and those people are empowered to innovate and to deliver. We need to ensure our business platform is fit for future growth and expansion, that we recognize and efficiently manage the challenges of the environments that we’re working in. We are attracting the best people. We are focused on driving efficiencies and synergies across our businesses whilst being nimble in a fast-changing world.

Finally, we are actively exploring and investing in sensible, well-considered new horizons for each of our businesses. We are adding world-class investment capabilities, and we are entering new markets.

Overlaying each of these points is our risk management framework, where we feel risk is owned by every person at Perpetual, and it’s embedded into every decision that we make. Whilst the environment remains challenging, the Perpetual brand and the trust that is bestowed in it is our greatest asset. Combined with our strong balance sheet and our risk-adjusted decision-making, we believe that Perpetual is well positioned to continue to execute our strategy and to deliver quality sustained earnings growth over time.

With that, I’ll join Chris over to my right and open up for questions.

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Questions and Answers

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Robert William Adams, Perpetual Limited – MD, CEO & Director [1]

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Andrei?

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Andrei Stadnik, Morgan Stanley, Research Division – VP [2]

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Andrei Stadnik from Morgan Stanley. Just wanted to ask about your thoughts on further M&A. Obviously, Trillium looks like a very sensible first acquisition, gives you that footprint. It gets you up to start. But you hinted previously you would consider multiple acquisitions. So now you’ve got the first one out of the way, what are you looking for in other potential asset management acquisitions?

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Robert William Adams, Perpetual Limited – MD, CEO & Director [3]

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Hopefully, Andrei, everything we do is sensible. I’d like to say that to start. But yes, as I said, we’re very excited by Trillium. We think it’s a terrific business. It’s a unique business. It’s an irreplaceable business. And whilst we haven’t completed on the deal yet, Michelle McDonough, who’s the Chief Operating Officer, is in the room with us. She spent a week with us. We’re planning pretty hard for the completion and day 1 activities. And we’ve also got Chuck Thompson in the room, who is our new head of U.S. distribution and corporate strategy. So yes, we’re mapping that plan out.

So there’s plenty to do. There’s plenty to do. But there will be more. We have a very active M&A pipeline. As you know, David Lane has been fully focused on asset management, acquisition opportunities, and we will continue to prosecute that pipeline.

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Andrei Stadnik, Morgan Stanley, Research Division – VP [4]

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And the second question on Perpetual Private. The market-driven — the market-related fee margin has been very stable compared to peers being pricing down, platforms and product fees and so forth. So what is it about your business that’s giving you pricing resilience on the wealth side?

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Christopher Green, Perpetual Limited – CFO & Interim Company Secretary [5]

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I think the first thing I’d say is that we’ve had less legacy issues than others. We’ve had some, but they’ve been far less prevalent than some of our peers. I think there’s still an unknown to a degree, which is how the wash up on the removal of commissions comes through the industry in terms of where in the value chain changes will come. We’re exposed, I think, again, to a lesser degree than some of our competitors. But I would say that the primary reason is that we just had less legacy issues that we ran our book in a slightly different way, and we had less exposure than some of the others.

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Robert William Adams, Perpetual Limited – MD, CEO & Director [6]

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I think the other thing I’d add to that, Andrei, is the uniqueness of Perpetual Private’s offer and the markets that we’re operating in and the channel focus. I think all those things combined to give us more pricing power in this sector than most players.

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Christopher Green, Perpetual Limited – CFO & Interim Company Secretary [7]

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Nigel?

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Nigel Pittaway, Citigroup Inc, Research Division – MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst [8]

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It’s Nigel Pittaway here from Citi. A question first, if I may, on the costs. I mean you’re saying 4.5% guidance for growth for the full year. That does imply around about 11.5% growth second half versus first half. So the first question is, sort of, can you maybe expand on the reasons for why we’re getting such strong cost growth half-on-half? And then secondly, maybe you could comment on the flexibility in terms of moving that up and down, if the revenue environment were to change.

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Christopher Green, Perpetual Limited – CFO & Interim Company Secretary [9]

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Yes. So there’s — there are some seasonal elements to that, which our variable rem process typically has more of the variable rem come through during the second half. So that starts to come through. We are assuming that all 16 advisers come through with a certain timetable in the second half, and that is leading to a reasonable increase. And we’re also including a reasonable amount of cost associated with continuing to interrogate other inorganic opportunities. So together with all of those, that’s what’s driving the increase in the second half.

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Nigel Pittaway, Citigroup Inc, Research Division – MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst [10]

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Okay. So does that interrogate other inorganic opportunities go up from the first half for us?

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Christopher Green, Perpetual Limited – CFO & Interim Company Secretary [11]

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And we have to complete Trillium as well.

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Nigel Pittaway, Citigroup Inc, Research Division – MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst [12]

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Right. And the flexibility?

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Robert William Adams, Perpetual Limited – MD, CEO & Director [13]

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Whether it goes up or not depends upon how it goes — at what stage we might be in other M&A opportunities. So I think it’s impossible to tell at this stage, Nigel. Yes, if we happen to lock on to something, the minute you do, then your cost profile starts to increase.

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Christopher Green, Perpetual Limited – CFO & Interim Company Secretary [14]

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We also have the second phase of the operating model review coming through. That has process improvements, and there are some cost cuts here that will come through below the line. But we’ve also assumed some of the benefits that flow from that flow through in the second half.

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Nigel Pittaway, Citigroup Inc, Research Division – MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst [15]

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Okay. So I mean 11% growth, you’re saying you’re not sure whether the acquisition costs go up. You’ve got some benefits. I mean…

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Christopher Green, Perpetual Limited – CFO & Interim Company Secretary [16]

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Which is why I’ve tried to give you some guidance.

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Nigel Pittaway, Citigroup Inc, Research Division – MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst [17]

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And the flexibility, if the revenue environment changed?

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Christopher Green, Perpetual Limited – CFO & Interim Company Secretary [18]

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Yes. There’s a little bit of flexibility there. I think we have the ability to ratchet up and down the speed of acquisition of the advisers into PP. And obviously, that variable rem line moves in line with revenue as well.

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Nigel Pittaway, Citigroup Inc, Research Division – MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst [19]

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Okay. And then maybe just a question on the active M&A pipeline. You’re obviously going to have some demands on capital moving forward, yet you’re still sort of paying dividends at 95%. I mean does at any time that sort of disconnect break in that as you sort of demand more capital, the dividend payout naturally comes down?

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Christopher Green, Perpetual Limited – CFO & Interim Company Secretary [20]

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Do you want to start?

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Robert William Adams, Perpetual Limited – MD, CEO & Director [21]

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No, go ahead.

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Christopher Green, Perpetual Limited – CFO & Interim Company Secretary [22]

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At the moment, we don’t have an intention to change the dividend policy that we have in place. What would drive that change is more likely to be more overseas earnings that may change the NPAT number versus a cash earnings number, and we will change the underlying driver. But as far as the amount of money flowing through as dividends, we have no intentions to change at this point.

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Robert William Adams, Perpetual Limited – MD, CEO & Director [23]

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Yes. It’s ultimately a Board decision, of course. But depending upon what actions we take in a forward-looking sense, I’m sure the Board, at each of those junctions, will reassess.

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Brendan Carrig, Macquarie Research – Research Analyst [24]

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Brendan Carrig from Macquarie. Just a few questions just on Trillium. I’m interested to understand a little bit better around the comments around revenue growth leading to double. So if markets presumably — or sorry, hypothetically were to correct, that revenue growth would be impacted in that context? Or is there a market protection element in that revenue hurdle?

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Christopher Green, Perpetual Limited – CFO & Interim Company Secretary [25]

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No, it’s a pure revenue hurdle.

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Brendan Carrig, Macquarie Research – Research Analyst [26]

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And do we have — are you able to provide any starting guide as to where that revenue starting point might be? Can we get some idea of where the approximate revenue margins in that business are and/or where the EBITDA potentially starts in terms of costs?

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Christopher Green, Perpetual Limited – CFO & Interim Company Secretary [27]

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No. What I would say is that it requires significant revenue growth for the earn-out to even kick in. I’d rather not, at this point, say where that exactly is.

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Brendan Carrig, Macquarie Research – Research Analyst [28]

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And then maybe just on PCT. So there was a slide with the first half versus second half. So typically, we’ve seen that second half seasonality with sort of $3 million to $5 million of additional revenue contribution in the second half. Would it be fair to assume a similar kind of seasonality going forward just given the elevated revenues in the first half? Or would you expect that to not be as pronounced given the strength of the first half?

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Christopher Green, Perpetual Limited – CFO & Interim Company Secretary [29]

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Look, it was certainly a very strong first half. That seasonality, I don’t think, is impacted by that. Historically, when we’ve had those strong first halves, it hasn’t necessarily resulted in a correction in that second half. So at this point, we’re assuming that, that same level of seasonality will flow through in the second half for PCT.

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Brendan Carrig, Macquarie Research – Research Analyst [30]

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And the last one, just on Perpetual Private flows. So still in positive territory. That was $100 million, which has been the trend for the last couple of halves. Would you have expected that to have picked up yet just given the advisers coming on? Or were you more realistically thinking that next half or the one after is where we might start to see a bit of an acceleration in those flows?

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Christopher Green, Perpetual Limited – CFO & Interim Company Secretary [31]

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We’re slightly ahead of where we thought we would be in terms of flows for those advisers, but we weren’t particularly aggressive on that. Yes, I think we’ve talked about that the first 6 to 12 months really bring them on — bring them into the business and the money starts to flow. It’s a little ahead of that. So we’ll see acceleration in flows, but it’s not dramatically above where we thought we’d be.

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Edmund Anthony Biddulph Henning, CLSA Limited, Research Division – Research Analyst [32]

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It’s Ed Henning from CLSA. A couple of questions from me. Just following on Trillium. Can you just talk about how it’s distributed now? And will it be a transition before you go to your distribution strategy? So will that kind of ease off before it accelerates? And then just a second one on PI. You saw a reduction in intermediary retail and growth in cash and fixed income, but your margin was up. Can you just touch on what drove that? And also with Trillium, what impact we can kind of expect on the margin from there.

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Robert William Adams, Perpetual Limited – MD, CEO & Director [33]

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So maybe I’ll just handle Trillium, and you can handle cash and fixed income and margin. So I think — Michelle, hopefully, I’m not going to be rude here. By Trillium’s own admission, I think they’re underinvested in distribution. I think there is 1.5 resources out of 47 in the business focused on distribution. Yes, so we will be investing in distribution.

Obviously, Chuck coming on board, Chuck will drive that charge. At Henderson, he’s built up a team that got to just under 50 in size. He knows how to manage large teams across channels. The Henderson book of business was predominantly retail, actually. They have a very strong institutional component, particularly in the latter years. So we would expect Chuck to — Chuck is going to be well resourced for a business of this size to exploit further opportunities.

I think the good news that — you can feel free to speak to Chuck afterwards, and he can talk about it, is the fact that some good work has been done by the Trillium team. So the presence of key portfolios, key funds on the major wirehouses is there. But then the backup work to get those — that presence into model portfolios and the get — the distribution forces in the wirehouse is working the right way. And to provide the right sort of collateral and other support are all areas that we’ll invest in.

And even though, as I mentioned before, we’re a few months off completion, the preparation work is continuing — has already started. And in fact, I think the week after we announced, we started that planning process. So I think we’ll be adding resource. We’ll be exploiting the opportunities that exists and creating new ones. And it will be a focus on driving existing sub-advisory relationships, opening up institutional and consultant-led channels and working with the wirehouses.

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Edmund Anthony Biddulph Henning, CLSA Limited, Research Division – Research Analyst [34]

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And just before you finish on that is — do you think there’s some quick wins there? Or is it just more a medium-term build-out to try and accelerate that distribution?

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Robert William Adams, Perpetual Limited – MD, CEO & Director [35]

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Yes. We’ll wait and see. We’ve got relatively conservative short-term expectations. The business, as Chris alluded to, is doing terrifically well right now with some really good flows coming in just in the short term, which is great news. So yes, I mean I think — I’d say firstly, medium to long-term expectations of what we can do with the Trillium team. I’m very positive about what we can do over the longer term.

And I would say also, yes, sorry, the market reaction and the client reaction has been terrific. I think almost universal positivity coming out of the Trillium team themselves because they’re welcoming the investments we’re going to make into the business. Positive reaction from clients, again, almost universal. And certainly, the market reaction. The recognition of the significance of this space. And more importantly, the recognition of the significance of Trillium’s role in this space over 38 years is clear.

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Christopher Green, Perpetual Limited – CFO & Interim Company Secretary [36]

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In terms of margins for PI, you will have seen that most of the outflows this half were from intermediary channel. But the bigger effect is actually the outflows from institutional towards the back end of the prior half. So it was that pull-through of the institutional from the prior half that’s increased this — improved the mix, and that’s what’s held up the margin.

As far as Trillium is concerned, it’s probably a little too early to say. We’re still coming up with our channel strategies and how we’re going to sell that product. But I wouldn’t have thought a material impact in the short term.

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Matthew Dunger, BofA Merrill Lynch, Research Division – Research Analyst [37]

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Matt Dunger from Bank of America. If I could just follow up on that margin question within PI, obviously, resilient margins. Given we’ve talked previously about some of the excess capacity in some of your funds, are you expecting margin pressures going forward within PI?

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Robert William Adams, Perpetual Limited – MD, CEO & Director [38]

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Yes. I mean margin pressure is a constant. It’s an industry-wide affliction. Yes, we’re all impacted by it. And I think in particular in active equities, there are further pressure points, obviously, the biggest one of those being our flows to passive. So I think all those things combined to say that margins certainly are going to improve in the short term. That’s for sure.

Yes, having said that, clearly in PI and Aussie equities, we’ve lost a lot of institutional business over the recent years. And we think there are opportunities for us to replace that institutional capacity at probably better than the blended rate of what that book once was. But that’s going to take time. And I think we need a few more tailwinds from a style perspective before we can be too aggressively positive about that.

Yes. So we might turn to the phone to see if there are any questions coming from the phone.

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Operator [39]

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(Operator Instructions) We have a question from the line of Kieren Chidgey from UBS.

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Kieren Chidgey, UBS Investment Bank, Research Division – Executive Director & Research Analyst [40]

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Chris, just had a question on the cost out program. Can you just give us an idea of what the run rate was at the end of the first half? I’m not sure if I missed that. And the contribution into the P&L.

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Christopher Green, Perpetual Limited – CFO & Interim Company Secretary [41]

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I didn’t actually give you that. Look, it was pretty modest because a lot of the effort and outcomes occurred very late in the half, to be honest. So we did a lot of the planning and it was executed late in the half. So not a lot of benefit there. And I think that’s again why we’ve tried giving probably a little bit more guidance on the cost side than we have otherwise because of this — a ton of moving parts on our expense line this year, whether it be the cost out of the op model and the benefits that are flowing, the growth initiatives in adviser acquisitions, the acquisition we’ve made, the other acquisitions we’re looking at. And that’s why we’re doing that overall guidance, to give you a bit of a steer.

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Kieren Chidgey, UBS Investment Bank, Research Division – Executive Director & Research Analyst [42]

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Okay. And very small point, but sort of what’s the negative performance fee in equities has as a reason?

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Christopher Green, Perpetual Limited – CFO & Interim Company Secretary [43]

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That was an unusual product that no longer exists, thankfully, where when we underperformed, we had a negative performance fee. So that was a one-off. It’s gone.

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Robert William Adams, Perpetual Limited – MD, CEO & Director [44]

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It was a mandate. Yes, a mandate. And that was just a quirky historical fee construct in that mandate. Sometimes some business isn’t bad to lose.

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Kieren Chidgey, UBS Investment Bank, Research Division – Executive Director & Research Analyst [45]

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Right. And Rob, just on the Trillium acquisition, you’ve given some flow history, which is useful. Can you just talk about the overall performance metrics of that business and sort of why you’ve got confidence you can obviously grow that business?

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Robert William Adams, Perpetual Limited – MD, CEO & Director [46]

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I’m going to — I think in — success in asset management is much about the narrative and engagement as it is about the performance. And when you have both, you can be very confident. And in Trillium, we’ve got both. We’ve got a terrific narrative, an amazing history, a first class, as I said, world-class investment team. And we’ve got good numbers across the board to support it over a very long term. Not many people have a 20-year track record of outperformance in fossil fuel free funds. It’s unique.

So that’s why we’re so excited about the opportunity because we’re ticking all of those boxes. And in many ways, the good news is that the business has been, I would say, and it’s not a criticism, it’s just the fact, it’s been underinvested in from a technology perspective. Personally, I love it when we find these opportunities. It’s exactly the sort of thing we want.

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Kieren Chidgey, UBS Investment Bank, Research Division – Executive Director & Research Analyst [47]

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And the more recent performance over the last 3 to 5 years, are you able to comment broadly on that?

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Robert William Adams, Perpetual Limited – MD, CEO & Director [48]

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Actually, I haven’t got anything in front of me. But I’m happy to share that with you. I mean I think in general, I’m looking at Michelle here, in general, across all of our strategies, yes, I would say, slight to median outperformance across the board.

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Christopher Green, Perpetual Limited – CFO & Interim Company Secretary [49]

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I’m going to go against my team’s advice here and give you some more guidance. In terms of FY ’19 versus FY ’20, we’re expecting somewhere between $9 million and $11 million as a result of the op model changes to hit this year.

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Operator [50]

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(Operator Instructions)

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Robert William Adams, Perpetual Limited – MD, CEO & Director [51]

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There’s nothing more from the lines. We’ll go back to the room. Andrei?

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Andrei Stadnik, Morgan Stanley, Research Division – VP [52]

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Just a follow-up question around distribution. So you mentioned that the cost of building out distribution efforts in U.S. initially is part of the Trillium deal metrics. But how far along does it get you in the journey? And does that just cover just FY ’20 costs? Or does that cover building footprint into FY ’21 as well?

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Robert William Adams, Perpetual Limited – MD, CEO & Director [53]

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I’m looking at David Lane here. How many resources did we put in distribution in our assumption? 6, yes. So the business has historically had and has today 1.5 people focused on distribution. We’ve budgeted for an initial build-out of 6 people. Chuck is by — I’m probably not the best person to ask because I’m biased, but independent people will see Chuck as one of the most successful senior distribution leaders in asset management. So I think we’re in pretty good shape. And I think that sort of resource allocation across the half a dozen key capabilities is more than sufficient.

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Christopher Green, Perpetual Limited – CFO & Interim Company Secretary [54]

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And I think it’s important to keep in mind, too, that when we talk about Trillium being accretive next year, that includes the costs associated with that build-out in those numbers.

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Robert William Adams, Perpetual Limited – MD, CEO & Director [55]

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Yes. And also, let’s look at other components here, too, I mentioned in the slide in relation to Adam Quaife who’s our Global Head of Distribution. Adam’s run teams at Franklin Templeton were amongst the most successful teams in 4 different parts of the world, in Australia, in Europe, in the Middle East and Asia. So we can see real opportunities for Trillium in some of those markets, probably led by here in Australia. We’ve got a terrific brand, 34 people in distribution team to be taking one of the world’s best integrated ESG managers into this marketplace is exciting and pretty straightforward for us from a cost perspective.

And then to cherry-pick, I mentioned in my formal presentation the European market opportunities. And we know that Trillium’s had inbound calls from major players who are recognizing the fact that the landscape is changing in Europe. I mean Europe is already a significant investor into ESG products. But there is this proposed legislation, which requires a specifically clearly stated ESG strategy and allocation. And that’s why Trillium has been getting inbound calls from some of the biggest names in financial services in Europe.

And Adam’s run teams in Europe. He knows those players. And so one of the first things we’ve had this conversation — yes, one of the first things Matt Patsky, the CEO, and Adam will be doing, will be knocking on those doors and choosing which one makes sense for us.

Anything else? Anything else on the line? On the phone? No?

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Unidentified Analyst, [56]

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Such a good business. Why are they selling? Why are the owners selling the business?

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Robert William Adams, Perpetual Limited – MD, CEO & Director [57]

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I could ask Michelle. She’s a — why not? Do you want to jump up? Sorry, it’s unscripted. So Michelle has been at Trillium for 10 years. She’s worked with Matt Patsky for 20 years in the ESG space. She’s Chief Operating Officer of the business and 1 of 3 senior partners in the business.

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Michelle McDonough, Trillium Asset Management LLC – Managing Partner [58]

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Right. And so I think that for Trillium, I think like Rob mentioned, we’ve underinvested in distribution. And I think Perpetual and their commitment to our mission and their kind of trusted brand here and their commitment to distribution and success they’ve had create a great partnership for us to continue doing what we’ve really done well and focus on our strengths and leverage some of the expertise of the senior team here, both in hiring strong distribution people like Chuck and getting us out there in the market.

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Unidentified Analyst, [59]

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(inaudible)

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Robert William Adams, Perpetual Limited – MD, CEO & Director [60]

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If you can just wait for the mic. Thanks.

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Unidentified Analyst, [61]

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I was told that you have such a good business. Trying to boost your distribution won’t be so hard to do. And I mean why did the business owner, with such a big business, haven’t thought of that, okay, we’ll keep the business, invest more money in the distribution team? As a businessman, it doesn’t [add up].

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Robert William Adams, Perpetual Limited – MD, CEO & Director [62]

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Can I say something? And Michelle can say whatever she sees fit. But you’ve got to bear in mind, distribution is not easy. It’s not straightforward. It requires a very specific expertise to get it right. And as I continue — I’ve said for a long, long time, I’ll keep saying it, asset management companies only work when you get 2 things right: when you have world-class investors and world-class distribution. It’s very rare that you — that one can be both.

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Michelle McDonough, Trillium Asset Management LLC – Managing Partner [63]

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Yes. So I would agree with that. I think where Trillium’s strengths have been in the past has really been in gaining access to the platform. So we are available, I would say, much above our weight in the U.S. across all of the wirehouse channels via every opportunity to distribute our strategy and — sure. So we’re widely available on Morgan Stanley, UBS, Wells Fargo, Raymond James. And we have been out there on platform and doing all of the things that we need to do there. I think where we have not crossed the line is getting into the research approved list and getting people on the street that are actually getting product into advisers’ hands. That doesn’t mean we haven’t had that slow and steady success.

So we’ve been growing steadily through those channels and even more so through our high net worth and direct client base. But I think that this gives us an option to do it faster and greater and make more investment without sacrificing dollars that we currently have been committing to spend to ensure that we keep world-class advocacy team, to keep our investment team strong and not to defray dollars that were helping us and were already committed to make us successful with a partnership with Perpetual.

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Robert William Adams, Perpetual Limited – MD, CEO & Director [64]

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All right. I think unless there’s any more questions in the room, once again, Chris, myself, the Executive Committee of the Board, thank you for your interest in Perpetual. Thank you for your time today. And I look forward for any follow-up questions. Have a good day.

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